Cryptocurrency Arbitrage: Types and Scaling

Cryptocurrency Arbitrage: Types and Scaling

Table of Contents

1. Introduction
2. Terminology
3. Intra-Exchange Arbitrage
4. Inter-Exchange Arbitrage
5. International Arbitrage
6. Scaling

Introduction

Hello, it’s WTC Exchange again, and this is the second part of our material on cryptocurrency arbitrage. In this article, we will discuss the types of arbitrage and how to scale this “business.”

Terminology

First, let’s familiarize ourselves with some terms that will make it easier to understand this topic.

• Screener – a program that automatically finds the best trading offers on popular exchanges and cryptocurrency platforms and notifies you where you can profitably buy/sell cryptocurrency.
• Arbitrage Bot – a program that relies on the price difference of cryptocurrencies and conducts operations without direct human involvement.
• P2P Trading – direct buying/selling of cryptocurrency without the involvement of a third party/intermediary. Essentially, you buy someone’s currency directly.

Intra-Exchange Arbitrage

When it comes to cryptocurrency arbitrage, there is quite a variety of types. The main differences between the types are the exchanges used. In the first case, all operations are conducted within a single exchange, and this type is called intra-exchange arbitrage.

Example: Buy Bitcoin for 20,000 USDT. Then exchange Bitcoin for 14 Ethereum on the same exchange. Finally, exchange 14 Ethereum for USDT at a price of 20,030 USDT. The profit is 30 USDT, or the equivalent of $30.

Let’s look at the pros and cons of this type of arbitrage:

Pros:

• + Everything is done within a single exchange, which simplifies the arbitrage process.
• + Possible savings due to reduced fees as a frequent customer.

Cons:

• – Moderate earnings compared to other types of arbitrage.
• – It’s advisable to have and understand third-party software and bots that will track opportunities.
• – Given recent events with exchange blockages and bankruptcies, there is a high risk of losing money.

Inter-Exchange Arbitrage

Inter-Exchange arbitrage is when the purchase of cryptocurrency is made on one exchange where the asset is cheaper and the sale is on a platform where the asset can be sold at a higher price.

Example: On exchange “A,” Bitcoin is selling for 20,000 USDT. On exchange “B,” the current price is 20,050 USDT. Buy on exchange “A” and sell on exchange “B.” The profit is 50 USDT before considering trading fees.

Pros:

• + During periods of high volatility, the spread percentage is very high, leading to significantly increased earnings during such times.
• + If you find a good combination with a lesser-known exchange, it can be a profitable source for an extended period.

Cons:

• – Transaction fees after transfers between exchanges consume a substantial portion of the profit.
• – Verification requirements on exchanges. In some cases, registering on a lesser-known exchange can lead to a data breach.

International Arbitrage

International arbitrage is made possible by the price difference of the U.S. dollar between the exchange of a particular country “A” and the price of USDT on P2P platforms.

Example: Buy the dollar at a rate of 100 units of currency, send them to a card in Georgia. There, withdraw the money, buy USDT, and send it back to you. Sell USDT at a rate of 105. Profit: 5%.

Pros:

• + The highest earnings among all types of arbitrage.

Cons:

• – For some connections, you need to have at least one trusted person abroad or be there yourself.
• – Typically, the initial stage of the connection (buying dollars) is the most complicated.
• – Over time, bank accounts may get blocked, leading to a loss of both means to conduct operations and funds.

Scaling

Scaling is the next logical step for any business. What can you do?

In all forms of arbitrage, the main goal is to maximize turnover. Your entire earnings depend on it. Therefore, in any case, gather a reliable team that you are willing to trust with your money, time, and connections. At the very least, in the early stages, consider taking on 1-2 trusted individuals to handle operational tasks. It would be great if these acquaintances already have experience with cryptocurrencies. However, if they lack experience, it’s not a problem; everything can be learned, but it will take time.

It’s essential to pay salaries exclusively in percentages of earnings. This approach protects you from unnecessary expenses and enforces mandatory KPI based on earnings.

As we mentioned in our first article, arbitrage is not just about moving money around. Therefore, after your initial team members have acquired enough competence, delegate to them the task of finding new connections for an additional fee.

Above all, do not seek team members through headhunters and other job markets at the beginning of team collaboration, as there’s a significant risk that your money will simply disappear.

In the case of intra-exchange and inter-exchange arbitrage, be sure to pay attention to the software used by you and your team, such as screeners and bots.

In the case of international arbitrage, there is an additional variable: expendables. In any case, sooner or later, all your cards through which you plan to conduct arbitrage will be blocked.

There are two options:

1. Use the services of drop shippers willing to provide cards for a percentage of your spread.
2. Ask acquaintances to create cards for a percentage of your spread.

Don’t forget that in international arbitrage, card blocking occurs not because the bank doesn’t want you to make a profit. Essentially, an astronomical sum of money will pass through your (or someone else’s) account that is neither declared nor documented, which will pique the interest of not only the bank but also tax authorities.